Taxing the oil giants is a rotten idea

In September 2020, at the height of the pandemic, the Zoom video conferencing group had a bigger market value than Exxon, one of the world’s giant oil and gas companies. 

Today, Exxon is back in favour and valued at $358bn on the New York Stock Exchange, making it worth some 13 times the value of Zoom. 

Zoom is not the only tech company to be hammered by inflation fears or usurped by old-fashioned fossil fuels. Apple’s crown as the world’s most valuable company has been toppled with Saudi’s Aramco taking the top spot. The Saudi oil giant is now worth $2.4trn following the recent surge in oil prices. 

Here in the UK both BP and Shell have seen their shares soar over the last year as they have recovered from the gloom of the pandemic and are back to making decent – some would say – indecent profits. BP is now worth £78bn, Shell has a price tag of £168bn while shares in Centrica have also enjoyed a renaissance.  

How the tables have turned. Fossil fuels are back, whether we like it or not. Some would say they never went away, and they are right. Despite the growth of renewables, the global demand for fossil fuels was on the increase even though many of the big oil majors have been selling off exploration fields in the search to go green.  

Instead of re-investing their profits back into new exploration, many of the oil majors have been maintaining existing levels of supply and investing in renewables. 

But now they are back in demand and no one quite knows how to handle the crisis. The last two years of on-off lockdowns, supply chain hiccups prompting energy shortages and, more recently, Russia’s invasion of Ukraine have forced policy-makers, as well as investors, back to the drawing board to rethink their investment strategy towards fossil fuels. 

They all know that in order to make up for Russia’s oil and gas output, existing oil giants are going to have to dig out of the ground every millilitre they can. Yet they still face an entire industry of ESG – environmental, social and governance – investors and analysts who have, for the last decade, been treating oil with the disdain they once reserved for tobacco or defence companies. 

There are signs of a small shift in attitude. Even Blackrock, giant among giants of asset management, is softening its stance. The sight of Warren Buffett, the legendary investor of Omaha, piling back into oil has given them the strength they needed to cool down the ESG chatter.

Some are waking up to the fact that keeping the public warm and able to cook might just, after all, fit the social bit of ESG. But the ESG caravan has had a devastating impact on investment: WoodMackenzie estimates that annual oil and gas spending dropped from $750bn per year ten years ago to around $400bn a year. To get oil and gas production motoring again, the oil giants will have to double down on new exploration and development.

Which is why the threat by the UK government to impose a windfall tax on BP and Shell, and possibly even the smaller oil exploration companies, is such a daft idea. You can see why the government might be tempted by the calls coming from all parties to raise extra cash from the oil giants when consumers are suffering from such high energy bills. The populist appeal with focus groups is obvious: “Tories tax greedy oil giants to help you keep the lights on.” 

What’s more disappointing is that it’s a proposal that appears to be gaining currency even with the most supposedly conservative of Conservative ministers. Indeed, Chancellor Rishi Sunak is said to be going soft on the idea, and has asked the Treasury to draw up proposals looking at how such a tax would work. He also warned that if the oil giants do not invest enough, then it’s a proposal he would of course look at.

The problem, of course, is what is enough. And what is enough to stop Sunak going ahead with a windfall tax? BP’s Bernard Looney has already promised that it will invest £18bn by the end of 2030 while Shell’s Ben van Beurden has pledged to invest up to £25bn over the next decade.

More pertinently, would a tax stop them going ahead with their promises? It’s difficult to tell. Much to the consternation of the industry, Looney took a different tack, saying that BP would press ahead with its investment plans even if there were such a tax. 

Centrica’s boss, Chris O’Shea, has been by far the most outspoken. In an interview after announcing bumper profits recently, he warned that taxing the North Sea oil and gas producers would be like “burn[ing] the furniture to stay warm” as it would hit investment and push up costs over the long term. 

More to the point, O’Shea says that he is deeply worried that so much ill-informed comment surrounding the windfall tax debate will end up reducing investment which would, in the longer-term, harm consumers as less investment means prices stay high. He should know: Centrica owns a chunk of the UK’s nuclear industry and co-owns a North Sea business, Spirit Energy.

As O’Shea sensibly added, it’s time for strategic thinking. And that, as we know from the last three decades of energy security, is something that neither the politicians nor long-term investors have been particularly good at. 

Whacking on a windfall tax now would hurt the very companies we should be encouraging to dip their toes back into the North Sea as well as looking elsewhere in the UK at new deposits: we have enough coal buried deep for another couple of hundred years.

What those pushing for a windfall tax also miss is that if the oil majors do continue making bigger and bigger profits, then the tax they will pay will also go up proportionately. 

As the last two years have shown, seismic events in one corner of the world are capable of irretrievably changing how we live and are more unpredictable than even the blackest of swans. Only two years ago, energy prices were heading into the permafrost.  

Yet just as we have seen oil prices rocket to more than $110 a barrel, energy prices could just as easily come tumbling down if the majors step up their production and invest in new fields. Fuel prices at the pump are already starting to dip as there is always a time lag. 

But what we have also seen is how dependent the world still is on nasty fossil fuels, and will rely on them even more to see us through the transition to healthier energy sources – which will come with time, and man’s ingenuity, rather than just following the increasingly ludicrous zeitgeist for flimsy renewables.

Rather than go for a populist vote with a windfall tax, the PM and Sunak need to dig deep, be brave and cut taxes. Now that would be popular, and the right thing to do.